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Selling the ‘Supply-Side’ Myth

January 27, 2012

Exclusive: Any rational assessment of America’s economic troubles would identify Ronald Reagan’s reckless “supply-side” economics as a chief culprit, but that hasn’t stopped Republican presidential hopefuls, led by Newt Gingrich, from selling this discredited theory to a gullible GOP base, reports Robert Parry.

By Robert Parry

Despite Newt Gingrich’s claim that “supply-side” economic theories have “worked,” the truth is that America’s three-decade experiment with low tax rates on the rich, lax regulation of corporations and “free trade” has been a catastrophic failure, creating massive federal debt, devastating the middle class and off-shoring millions of American jobs.

It has ”worked” almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences — like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more “free-market” solutions.

Former House Speaker Newt Gingrich posing with his third wife, Callista

Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as “voodoo economics,” was supposed to spur businesses to expand production (the “supply side”), thus creating jobs and boosting revenues from all the commercial activity.

“I worked with Ronald Reagan to develop supply-side economics in the late ’70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others,” Gingrich declared at a recent town hall event. “We ended up passing it into law in ’81. At the time it was very bold. People called it ‘voodoo economics.’ It had one great virtue: it worked.”

But that is not what the historical record really shows.

In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill and at the time, the “supply-siders” had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.

Their second key advantage was that nobody could say for sure what the results of the “supply-side” experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his “voodoo” remark, but you couldn’t see the future.

No More Mystery

Now, however, with three decades of experience with the experiment, the fallacies of “supply-side” economics are no longer a mystery. For instance, a major obstacle to today’s economic recovery has been the absence of “demand-side” consumers, not the availability of money to build more productive capacity.

And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.

Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash some estimates put the amount at about $2 trillion.

And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.

For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.

While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today’s citizens and for posterity.

The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich’s “big idea” of a colony on the moon.

In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley Authority, to educate World War II veterans through the GI Bill, to connect the nation through the Interstate Highway system, to launch the Space Program, and to create today’s Internet.

Out of those efforts emerged robust economic growth as private corporations took advantage of the nation’s modern infrastructure and the technological advancements. Millions of good-paying jobs were created for the world’s best-trained work force, giving rise to the Great American Middle Class. The obvious answer was to keep this up, with the government investing in new productive areas, like renewable energy.

Demonizing ‘Guv-mint’

Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing “guv-mint” and telling white men, in particular, that the “free market” was their friend.

Blessed with a talented pitch man named Ronald Reagan, “supply-side” became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup.

The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan, rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with the rich claiming a bigger and bigger piece of the national economic pie.

The nation’s debt crisis only began to subside after tax increases were enacted under President George H.W. Bush and President Bill Clinton, with Clinton’s tax hike pushing the top marginal rate back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an economic catastrophe.

The actual result was a booming economy, spurred strongly by the federal government’s new “information super-highway,” the Internet. The Clinton years also saw low unemployment and a balanced budget by the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course toward zero within a decade.

Ironically Gingrich also claims credit for that because as House speaker he worked with Clinton on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a single Republican vote, as the key factor in the budget turnaround.

After George W. Bush claimed the White House in 2001, “supply-side” dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush’s two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.

Even as most Americans struggled to hold a job and pay their bills, America’s super-rich lived a life of unparalleled luxury. With this concentration of money also had come a concentration of power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks to push often with populist rhetoric the policies that were dividing the country along the lines of a pampered one percent and a pressured 99 percent.

Now, looking back over the economic and fiscal history of the past three decades, you might think that few Americans would be fooled again by this sucker bet on “supply-side.” But the Tea Partiers and many rank-and-file Republicans seem ready to put what’s left of their money back down on the gambling table.

All four remaining Republican hopefuls Mitt Romney, Rick Santorum, Ron Paul and Gingrich have proposed lower tax rates especially on the rich with the same enduring but fanciful faith in “supply-side” economics.

Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It’s already down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can live off their investments and pay a lower tax rate than what many middle-class Americans pay on their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal income tax under Gingrich’s plan.

The Republicans seem to be counting on the parallel propaganda campaign of demonizing “guv-mint.” They’re pinning their hopes on an ill-informed electorate (especially white men) siding with “the one percent” over their own working- and middle-class interests.

The GOP hopes also may hinge significantly on how determined some whites are to get the country’s first black president out of the White House. Historically, demagogic U.S. politicians have had great success in exploiting racial resentments, although these days often with coded language like Gingrich calling Barack Obama “the food-stamp president.”

The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote “states’ rights” the near opposite of what the framers actually were doing.

Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787 threw out the Articles of Confederation, which had made the states supreme and the federal government a supplicant.

The Constitution reversed that situation, eliminating state “independence” and bestowing national sovereignty onto the federal Republic representing “we the people of the United States.” Contrary to the Tea Party’s false narrative, the Constitution represented the single biggest assertion of federal power in U.S. history.

When the Tea Partiers dress up in Revolutionary War costumes, they apparently don’t know that their notion of a weak central government and state “sovereignty” was anathema to the key framers of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual Articles of Confederation.

And, when the Tea Partiers wave their “Don’t Tread on Me” flags of a coiled snake, they don’t seem to know that the warning was directed at the British Empire and that the banner aimed at fellow Americans was Benjamin Franklin’s image of a snake severed into various pieces representing the colonies/states with the admonishment “Join, or Die.”

Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich references Ronald Reagan and his “supply-side” economics.

But the failure of Reagan’s economic strategy should be obvious to anyone who is not fully deluded by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades, but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy while the nation as a whole has suffered.

[For more on related topics, see Robert Parry’s Lost History, Secrecy & Privilege and Neck Deep, now available in a three-book set for the discount price of only $29. For details, click here.]

Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com. His two previous books, Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras, Cocaine, the Press & ‘Project Truth’ are also available there.

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26 comments for “Selling the ‘Supply-Side’ Myth”

incontinent reader

January 27, 2012 at 3:44 pm

Excellent article. There are many respected economists, including Joseph Stigler, the former Chief Economist at the World Bank, now a professor at Columbia University, Robert Reich, for Secretary of Labor in the Clinton Administration, now teaching at University of California, Berkekely, and James Galbraith, son of John Kenneth Galbraith, and a top economist and public policy thinker in his own right, now teaching at the University of Texas, who have little use for Reaganomics as a solution for today’s problems. I would urge readers to follow up with their texts. A particularly hardhitting one that demolishes the the traditional economic theories that Bob Parry has so effectively dissected, is Galbraith’s book “The Predator State: How Conservatives Abandoned Free Market Capitalism and Why Liberals Should Too”

The tragedy is not that there is no way out of the current crisis, but that these economists understand and explain what can be done, while Congress, the Administration and the media remain attached to the established dogma, as the large financial interests continue to accrue wealth and power, and tighten their control over the economy.

rosemerry

January 27, 2012 at 3:52 pm

The ignorance of USans seem to know no bounds. Instead of Israel, bases, wars, big corporations, rich bankers getting all the money, if it went into real public education for the people of the USA (allowing few reasons for “homeschooling” by parents) what a difference that would make. When a historian like the Newt can have such outrageous utterances, when a constitutional scholar like Obama can shred any part of the Constitution then lie about it, when the MSM no longer have any responsibility (since abolition of the Fairness doctrine in 1987 on Reagan’s watch) to have news with any but the “accepted” interpretation, how can the population have any chance of making good judgments, on politics or foreign policy?

Robert,
I just wanted to tell you what a great piece this is. I have been saying the same thing,but far less eloquent.
Goebbels once said something along these lines. You can control a people anywhere at any time by doing 3 things
1. Always have an enemy (Guv mint, Obama, illegals, gays etc)
2. Always be the Ultra Patriot
3. Always have the means to saturate and repeat and repeat your message until it becomes the truth (see talk radio etc)
The Corporatists definitely did their homework on Propaganda. My hope is that they have gone too far and OWS and sites like yours might begin to crack the cognitive dissonance mentality of republican voters.

I.for.one

January 27, 2012 at 4:50 pm

Dear ly.Gillooly: “sites like yours might begin to crack the cognitive dissonance mentality…” — would it were so. But I don’t hold out much hope.

piet

January 27, 2012 at 7:59 pm

indeed, cognitive dissonance cannot be counteracted with arguements, that’s one of the symptoms. It will lead even to more admiration: Look how my hero is standing up against all those wise guys…

William

January 27, 2012 at 5:08 pm

Mr. Parry, I have been a long-time reader of the articles from you and Consortium, and watch daily for the new ones to arrive in my in-box. This is one the best that I have seen here. All Americans need to wake-up and see the destruction Reagan’s “voodoo” economics started and have continued through the years. I fear that too many people’s eyes are closed and entrenched into false beliefs and acceptance of policies that did not, have not, and will not work. Excellent piece, for sure.

I don’t know what the one poster is talking about “Obama shredding the Constitution, then lying about it”. Nothing could be further from the truth.
As for Regeanomics, Vodoo econimics, supply-side economic or trickle down economics the author is EXACTLY right. I have been trying to tell people this for years. Unfortunately so many get their “news” from Faux News or from the GOP shrills. The vast majority of voting Americans are stupid. And the right wing uses the fear card no matter what the circumstances to advance their agenda that is destroying America. Excellent article!

VJ

January 28, 2012 at 12:33 am

The vast majority of voting Americans are not stupid. They may be ill-informed, or misinformed, or ignorant to historical facts, but stupid, I give Americans more credit. All political groups use the fear card, are you kidding? Are you really saying that Obama does not use a fear card? Goes both ways. Current Admin is trying to advance their agenda, that is to be re-elected. Truth has no place. Of course, stupid Americans buy it!

McTavish

January 29, 2012 at 10:28 am

Thank you, Mr. Parry for this article and the entirety of your work. Unfortunately, Jon, that sign was correct but for the wrong reasons. Obama has indeed kept pace with and at times exceeded Bush II in shredding the Constitution: surveillance, black ops, wars, general surveillance of citizenry without cause, prosecution of whistle blowers, nonrestoration of habeas corpus, assassination of American citizens at the direction of the President, the continuation of torture which many experts believe on good evidence is still taking place, infiltration of citizen groups (and prosecution of members of some of those groups) working for social justice, environmental health, and others expressing dissent of any kind, all authorized under the First Amendment but ignored by the police departments, state houses, and the Executive, Legislative, and Judicial branches, at times trumped up terrorism charges against hapless Americans practically incapable of tying their shoes much less terrorism, who have been set up by the FBI to serve as proof that we needed to hand over our rights to the Department of Homeland Security and the National Security State after all, and much more. Most recently, and most egregiously, the NDAA, which now codifies in American law the right of the President to detain without trial and forever (as the hostilities referenced in the bill will never end) ostensibly those guilty of terrorism but in reality any American thought to be a danger to the well-being of the rapacious elite who rule America. That is why Bradley Manning was tortured and whistle blowers are prosecuted–he and all the others are meant to show us that we had better not resist. It is not only the Right that is blinded by propaganda. Many Liberals are as well. The President is not a Liberal but a neoliberal and has conducted himself in office as a conservative president with some important conciliations to the Liberals, but not many and even those are subject to rescinding at any moment. In the moral sense and with respect to the Constitution one can also state that the President has committed crimes in not prosecuting Bush administration officials for their war crimes and the corporate criminals for their financial and other crimes. He has failed to make a case against conservatism or neoliberalism and is committed, judging from the activities of his administration, to continuing an aggressive foreign policy toward Russia and China notably and in involving this country in the affairs of almost every country in the world. He is a black man in a world where white men rule and perhaps some of his actions, maybe all, can be attributed to the fear he has of these people, to the emotional scars of his childhood, and having to make his way in a white world that is heavily racist. I don’t know. He was educated at elite schools and his actions conform with the beliefs of most of those who educate our elites. And in doing nothing about global warming he and all the rest are failing in their duty to the American people and the world. It appears that he and all the rest of our leaders have put their money on greater and greater authoritarianism, militarism, and repression versus leveling with the American people about the nature of the true threats that we face and do not want to include us in the conversation about how to counteract those threats. They want us to sit down and keep our mouths shut and take whatever they are willing to hand out. I do know that it is not good for America. We now live in a police state, a state of affairs long building (the greatest evidence of this is the incarceration of Blacks and Hispanics out of all proportion to their percentage in the population and taking into account the nature of their crimes versus those committed by Whites but there is much more evidence as outlined above and elsewhere that there isn’t room to go into here) and built piece by piece over many years without most Americans noticing, and our President is fully on board with that program as are the Republicans and much of the leadership of the Democratic Party. Both parties have brought this about and the saddest thing is that it was made possible because of the fear, racism, misogyny, selfishness, and general punitiveness of Americans themselves and the inattentiveness and perhaps cowardice (I refer in part to the Liberal class) of other Americans. Democracy and human rights are always under threat and we must always fight for them if we are to assure decent lives for ourselves as well as for others.

F. G. Sanford

January 27, 2012 at 9:31 pm

The real problem is white male penis envy. H&R Block must be doing more returns than anyone guesses. Why? Because the ditto-headed Limbaugh, Beck, Savage and Fox fans don’t seem to realize they’re not getting any of the tax breaks these Goebbelesque purveyors of white male mythology are spewing. This is a great article. But it requires a modicum of intellect and a Ritalin-enhanced attention span for most of our population to absorb. None of these boobs seem to realize that they don’t make enough money to benefit from ANY of the Reagan, Bush I or Bush II tax cuts. Newt’s food stamp line plays right to their single-synapse capacity to react. What we need are conceptual bullets. George Carlin had a good one. Just envision that famous picture of Rush Limbaugh sucking on that big, thick, brown…cigar. What’s up with all these dumb, fat, penis envying white guys sucking on those big, brown trickle-down cigars? Somebody needs to come up with a one-liner that pops a visual image of where those supply-side cigars are actually getting shoved. Trickle-down is something I personally associate with those deodorant cakes in the urinals at the bus terminal. But hey, I’m not your ‘typical’ white male.

canary #8

January 28, 2012 at 12:31 am

This is as clear as anyone can make it. Mr. Parry lays out the points and then shows how they connect in a logical way. Anyone with a high school education should be able to understand the cause and effect trail.

Skinnydog

January 28, 2012 at 4:28 am

REAGANOMICS – THE INVISIBLE HAND JOB.

grawss

January 28, 2012 at 5:53 am

Perhaps I’m just deluded by right-wing propaganda, as you say (I am not a republican), or perhaps I just notice that your article is as much propaganda as any other.

Now, I am by no means a friend of Newt Gingrich. I believe he is a corrupt, morally bankrupt douche who bows down to whoever throws him the most bones.

However, I can’t help but notice some funny little tidbits in your post.

You say Reagan’s supply-side economics failed, but immediately follow it up with: “Reagan also initiated an aggressive military buildup.”

Then you say Clinton’s tax increases succeeded, while immediately following it up with: “The actual result was a booming economy, spurred strongly by the federal governmentâ€™s new â€œinformation super-highway,â€”

And finally you say Bush’s tax cuts failed, and immediately follow with: “Combined with Bushâ€™s two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.”

No research required. You have provided me with enough proof that your only evidence requires that we, the readers, ignore several enormous facts. Reagan was a spender; a big one. The Internet (and an already rising economy) sure did help Clinton. And two simultaneous wars is anything but sustainable.

The fact is, we still haven’t seen true supply-side economics without some other circumstances. I believe it would work, but only with someone like Ron Paul, who understands the necessity of having a smaller government. Candidates like Romney or Newt would stomp this nation into the dirt faster than you can say “lobby check.”

Bart Meehan

January 28, 2012 at 10:19 am

Oh here we go with the “Saint Ron Paul” crowd. Thats Ron Paul who likes to travel first class at your expense and who profited from racist Newsletters that he previously defended but now claims to have known nothing about. Ron Paul who believes in freedom, that is the freedom to descriminate against others on the basis of their race or to have the Government tell you want you can and can’t do with your Ovaries. You Libertarians crack me up. No matter how many times your hair brained ideas fail you just claim it wasn’t pure enough. And “I believe it would work” is all the evidence you need. Well smaller Government, no taxes and no regulation is being tried right now pal. In a little place called Somalia. Doesn’t appear to be working out too well though.

grawss

January 28, 2012 at 4:38 pm

Here’s your homework for today, Mr. Meehan:

When was the last time we had a libertarian in office?
How can their hair-brained ideas fail when they’ve never been tried?

I’d also like you to think about our current rights despite the current president and presidents in the past. Are people still being arrested for what they put in their body? Is abortion legal everywhere? Is a person’s racist tendencies still relevant if they purposefully remove the power they have over related matters?

You must understand that despite all the titles, all the opinions and promises politicians tout, you still have nothing. Ron Paul’s absolute greatest promise is to remove these controls from the federal government.

“Supply-side economics” definitely won’t work without someone who doesn’t spend insane amounts, or doesn’t attempt to police the world (and a congress that doesn’t shut him/her down every chance they get). Part of me wishes Obama wasn’t stuck with all this war; we might have seen some actual progress. But like SSE, the world may never know.

grawss,
You missed that without “demand” no company is going to create new capacity and hire. On the contrary, they’ll cut down, including jobs. In your perfect “supply-side” Corporations will just sit on bigger mounds of cash… until, without demand, they’ll too go out of biz once they burn through that stash, like so many already have. The Randian and libertarian pipe dreams are so falacious, specious and passe. Those who believe them need to wake up.

tedbohne

January 29, 2012 at 4:13 pm

and put them in the hands of governors of state like GWB, Rick Perry, Mitt Romney, Scott Walker, Arnold Schwartzenegger (SP?) George Wallace and etc. Ron Paul is a republican turned 1787 libertarian. but still a republican

Big Em

January 29, 2012 at 6:00 pm

We HAD a very instructive ‘virtual’ example of libertarianism in the late 1800s in the US during the Gilded Age – – – I won’t bother you with a recitation of all the problems there, but suffice it to say that way too often it was a true Dickensian nightmare*. Also, even IF you’re amoral enough to overlook all the suffering during that era and focus on the economic growth (uneven though it was), you have to recall that this was an era when the European ‘settlers’ were exploiting a vast, almost virgin wilderness with lots of natural resources, moderate climate, relative geographical isolation, and low native population (the native Americans having been wiped-out by European diseases and military invasion forces).
Other than the climate, those conditions do NOT exist today. We’re importing much of our natural resources (especially energy), our US population (300M) is the 3rd largest of any country on the globe and is growing relatively slowly, and in this age of ‘globalism’ you can fly to the other side of the world in 8 hrs.

Large international corporations are driven almost solely by the bottom line – – – they don’t care about the unemployment here or anywhere else, other than how they can exploit it for cheaper costs. So, as Lex mentions above, corporations will either just sit on any excess cash they have, or they’ll build factories in China, India, Indonesia, etc, where they can pay people $.57/hr, whether we have the Neo-liberal trade policies as espoused by Reagan (and his successors) or some theoretical Libertarian trade policy that would be identical in practice. The only way they’ll voluntarily move back here in the near future would be IF they could pay workers in this country $1 or $2 per hour (they’d save some money on shipping, so they could afford to pay a little more!), then they could make more money than going overseas. Or look at Wal-Mart economic model – – – lots of non-union low-level workers without decent wages or benefits and a few billionaires at the top, THAT would be the economic result of a Libertarian society.

* (ie; for instance, NO workman’s’ compensation because we supposedly didn’t want intrusive government regulations, so if you lost a leg or arm at a poorly regulated industry [where you were working 12 hrs a day before those ‘communists’ pushed through a standard 8 hr day], well too bad – – – you were fired [because of course you could no longer do the job] WITHOUT any compensation [since back then the courts consistently ruled that workers assumed ALL liability for any job they took] and the company hired a fully-limbed person the next day)

chundini

January 28, 2012 at 4:49 pm

Your major premise in critical thinking is a non senquitur. Somolians are less likely to be as educated as the US population and more conncerned with todays meal than evaluating the whole picture. Our US economy is in the dumbs. We need viable consumers to make it better. They need meaningful viable jobs to make this happen. When they grow we all grow. Now only the top 1% grow and it takes a lot more to make many grow,

“[A] drastic reduction in the deficit…will take place in the fiscal year ’82.”
–President Reagan, news conference, cited in The New York Times, March 6, 1981. (In fiscal 1982, the first full year of Reagan’s presidency, the government ran up a record budget deficit of $128 billion.)

Early in his presidency, Reagan chose as his economic advisers a group that espoused a radical economic theory called “supply-side.” The supply-siders told Reagan that if he gave tax cuts to the top brackets (the wealthiest individuals) the positive effects would “trickle down” to everyone else. Tax cuts, they argued, would produce so much growth in the economy that America could simply outgrow its deficits. Reagan bought into supply-side theory, which is why in 1981 he predicted that there would be a “drastic reduction in the deficit.”

However, Reagan soon discovered that his supply-side advisers were wrong. Tax cuts, instead of reducing the deficit, caused the deficit to balloon. After 1981, Reagan made no more rosy predictions regarding the deficit.

At this point, Reagan would change strategy. He would blame the U.S. Congress for the record deficits that accrued during his years in office. Reagan would say that Congress was responsible, because Congress did not slash spending enough–meaning social spending, since Reagan always championed increased military spending.

Reagan chose to ignore the fact that his own Republican Party was in control of the Senate from January 1981 to January 1987, and that Congress actually spent less than what he originally had asked for. (for details click here)

Federal deficits would continue unabated until the presidency of Bill Clinton when fiscal responsibility would finally be restored. President Clinton would achieve a balanced budget (and even record surpluses) in large measure by restoring higher taxes on the wealthy.

F. G. Sanford

January 29, 2012 at 4:28 am

You’re mainly right, except that Reagan didn’t “discover” anything. He was well on his way to the twilight of senile dementia before he took office–you can hear it in his speech patterns, and many a neurologist has quietly commented along those lines. He was a gargantuan puppet manipulated by his “handlers”. And if senile dementia wasn’t at play, then he was culpable. The question that begs goes to malfeasance. If anyone ever finds the “October Surprise” smoking gun, then we have to start talking treason. To my perhaps limited expertise, “Iran-Contra” is enough to make that case anyway. But I really don’t give old Ray-gun credit for dreaming up that stuff on his own. Some of you must have missed his U.N. speech about an attack from another planet. Or the open-mike comment about, “The bombing begins in five minutes”. But my compliments on an insightful rendering of the facts the “supply-siders” choose to ignore.

tedbohne

January 29, 2012 at 4:04 pm

Don Regan was Reagan’s puppeteer

tedbohne

January 29, 2012 at 4:03 pm

Well said.

tedbohne

January 29, 2012 at 4:06 pm

a wonderful treatise, in my opinion, on “supply side” economics, and “trickle down economics is laid out in David Stockman’s well named volume, “The Triumph of Politics.”

Bob Loblaw

January 29, 2012 at 6:03 pm

The cult like loyalty to the Reagan narrative refuses to allow anyone to declare the precious Reagan mythology is fantasy.

President Obama began his assault on the foundation of the Reagan narrative in his Kansas TR invoked speech that spells out how Reagan was wrong.

The trouble with dismantling the meme of a “bad” government, and drowning it in Grover;s bathtub, is many words used to describe the situation are red flag words that get TP faithful riled up and condemning the Amurrica hater for their Communism.

Thank you Robert for helping us explain this without sounding like Karl Marx.